2025 (3) TMI 951 - HC - VAT / Sales Tax

Gujarat HC quashes attachment orders on guarantor's property wrongly treated as borrower's under SARFAESI Act

Ektaben Hardikbhai Mashru Versus Authorized Officer, State Bank Of India & Ors.

Gujarat HC quashed provisional and final attachment orders on property owned by third-party guarantor, not main borrower. Property was wrongly attached as ... Challenge to provisional attachment order - property was not owned by the main borrower but by a third-party guarantor - challenge to conditional share certificate - HELD THAT:- From the sale deed, it will be evident from page No. 57 that the property in question is the same property which is shown as property No. 3 in the auction notice. It is also evident that the purchaser is one Sangitaben Hareshkumar Mashru. It is also a matter of record which is undisputed by the parties that the said purchaser namely Sangitaben Hareshkumar Mashru was not a partner of M/s. Rameshwar Cotton Industries. In fact, the public auction notice at Page 46A of the paper book categorically refers to “Name of Title holder” of property No. 3 to be “Sangitaben Hareshkumar Mashru” and not M/s. Rameshwar Cotton Industries, which is only shown as title holder of property No. 1. Therefore, the aforesaid property being property No. 3 in the auction notice has been wrongly attached as a property of M/s. Rameshwar Cotton Industries or any of its partners, whereas, in reality it was a self own property, a third party – guarantor. Further it will be seen that the CERSAI Registration in respect of the charge by the Bank is dated 11.04.2008. Whereas, the date of issuance of notice under Section 135D of the Bombay Land Revenue Code, 1879 is 03.06.2015 and the date of attachment of the State Tax Authority is dated 13.08.2019. Therefore, evidently the Bank has prior charge over the property and following the law declared by this Court in Kalupur Commercial Co-operative Bank Ltd. Vs. State of Gujarat [2019 (9) TMI 1018 - GUJARAT HIGH COURT], it has to be held that the property in question, being property No. 3 in the auction notice dated 20.06.2022 does not bear any charge for the crown debts, after the same has been purchased in the auction by the Petitioner. Conclusion - i) The actions of Respondent No. 1 in issuing a conditional sale certificate with encumbrances are unlawful under the SARFAESI Act. ii) The attachment orders by Respondent No. 2 are also found to be invalid as they were applied to a property not owned by the borrower. The provisional attachment order as well as the final attachment order whereby the charge was created on the property being Commercial property at survey no. 316/8p, Sr. No. 294, Opp. Rajdhani Hotel, Mahuva Road, Badhada, Ta. Savarkundla, Dist. Amreli is hereby quashed and set aside - Petition allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:1. Whether the conditional sale certificate issued by Respondent No. 1, which included encumbrances from the Commercial Tax Office, was lawful under Section 26E of the SARFAESI Act.2. Whether the attachment orders by Respondent No. 2 on the property were valid, given the claim that the property was not owned by the main borrower but by a third-party guarantor.3. Whether the charge created by the Respondent No. 2 was subordinate to the charge of the Respondent No. 1, given the chronological order of the attachments and the auction.ISSUE-WISE DETAILED ANALYSIS1. Legality of the Conditional Sale CertificateRelevant Legal Framework and Precedents: The SARFAESI Act, particularly Section 26E, provides that after the registration of security interest, the debts due to secured creditors shall have priority over all other debts and government dues. The case of Central Bank of India Vs. State of Kerala was cited, which emphasizes the priority of secured creditors.Court's Interpretation and Reasoning: The Court found that the inclusion of the encumbrance from the Commercial Tax Office in the sale certificate was contrary to Section 26E of the SARFAESI Act. The Court emphasized that the secured creditor's charge should have precedence over the government's claim.Key Evidence and Findings: The sale certificate reflected an encumbrance of Rs. 34,02,518/- from the Commercial Tax Office, which was challenged by the petitioner as being contrary to the SARFAESI Act.Application of Law to Facts: The Court applied the principles from the SARFAESI Act and relevant case law to conclude that the encumbrance should not have been included in the sale certificate issued to the petitioner.Treatment of Competing Arguments: The Court acknowledged the petitioner's argument that the sale certificate should be free from such encumbrances and found no substantial counter-argument from the respondents.2. Validity of Attachment OrdersRelevant Legal Framework and Precedents: The Court examined the attachment orders under the context of the SARFAESI Act and the rights of secured creditors versus government claims.Court's Interpretation and Reasoning: The Court determined that the property in question was owned by a third-party guarantor, not the main borrower, thus the attachment orders were improperly applied.Key Evidence and Findings: The property was owned by Mrs. Sangitaben Hareshbhai Mashru, a third-party guarantor, and not a partner in the borrowing firm, M/s. Rameshwar Cotton Industries.Application of Law to Facts: The Court found that since the property was not owned by the borrower, the attachment orders were invalid.Treatment of Competing Arguments: The respondents did not effectively challenge the petitioner's evidence regarding the ownership of the property.3. Priority of ChargesRelevant Legal Framework and Precedents: The Court referred to the precedence of secured creditors' charges over government claims, as established in previous judgments like Kalupur Commercial Co-operative Bank Ltd. Vs. State of Gujarat.Court's Interpretation and Reasoning: The Court held that the charge by the bank, being registered earlier, had priority over the subsequent government attachment.Key Evidence and Findings: The CERSAI registration of the bank's charge preceded the government's attachment orders.Application of Law to Facts: The Court applied the principle that a secured creditor's charge takes precedence if registered before government claims.Treatment of Competing Arguments: The Court found that the government's claim, being subsequent, was subordinate to the bank's prior registered charge.SIGNIFICANT HOLDINGSThe Court concluded that the actions of Respondent No. 1 in issuing a conditional sale certificate with encumbrances were unlawful under the SARFAESI Act. The attachment orders by Respondent No. 2 were also found to be invalid as they were applied to a property not owned by the borrower. The Court emphasized the precedence of secured creditors' claims over government dues, citing:'The State's preferential right to the recovery of debts over other creditors is confined to ordinary or unsecured creditors... In no uncertain terms, the Supreme Court held that the appellant, i.e., the bank, was right in submitting that... it could not have appropriated the sale proceeds to the sales tax arrears payable by the firm, thereby defeating the bank's security.'Ultimately, the Court quashed the attachment orders and ruled in favor of the petitioner, affirming the priority of the bank's charge over the government's claims. The rule was made absolute to the extent of setting aside the attachment orders, with no order as to costs.